For the success of Keynes' argument, it was essential that he deny of classical theory--that wages and commodity prices are independent of each other. In Chapter 2 of The General Theory, he attacked the classical writers for an inconsistency between their micro and macro theory of prices. Claiming that they had "....taught us to believe that prices are governed by marginal prime costs in terms of money and that money-wages largely govern marginal prime costs," he formulated a new theory of price level determination for the macro model which was to emerge from The General Theory. Under it, the general level of commodity prices depends upon per unit labor costs plus a markup for the other factor payments which are conventionally called "profits."
The only way changes in the stock of money can affect the price level is by changing per-unit labor costs; this is done by changing aggregate demand through prior changes in the rate of interest. In many respects, the price-level determination in the Keynesian model appears to be a reversion back to the ideas of Thomas Tooke and the Banking School.
The direct linking of wages nd prices has an important consequence. It means that reductions in money wages to solve an unemployment problem will no longer be effective, for they simultaneously reduce commodity prices in proportion, leaving the real wage unchanged.
Additionally, Keynes denied one other postulate of the classical system--that the labor supply schedule was an upward sloping function of the real wage. He states that
....ordinary experience tells us, beyond doubt, that a situation where labor stipulates (within limits) for a money-wage rather than a real wage, so